Markets are calm; too calm, maybe.
In the wake of the cross-asset rout of 2022, investor return expectations are “at their highest in years”, according to a recent Mercer paper.
But optimistic market assumptions about a return to business-as-usual following the savage correction in shares and bonds last year might be misplaced.
“… it is possible that we are entering a low-growth, low-cooperation era coupled with rising volatility across environmental, geopoliticial and socioeconomic spheres,” Mercer says.
“This is elevating the risk of a ‘polycrisis’ involving energy and food supply crises, rising inflation, cyber attacks, failure to meet net-zero targets, weaponization of economic policy, and weakening of human rights.”
The prospect of a polycrisis – a term rebooted for modern pessimists by Columbia University historian, Adam Tooze – has important implications for how investors build portfolios, too, with Mercer suggesting the traditional 60/40 split between shares and bonds won’t cut it anymore.
Mercer has long championed alternative assets, which the global multi-manager and investment consultant says will be even more important in polycrisis times.
The report says there has “never been a better time to refocus on resilient portfolios that can withstand shocks and uncertainties, adapt to changing conditions, and seize investment opportunities”.
Firstly, the report recommends investors bring forward strategic asset allocation (SAA) reviews in light of the dramatically altered backdrop.
“The material change in underlying investment conditions has created a need to reassess medium- to long-term portfolio positioning,” Mercer says, without “necessarily” requiring more frequent SAA resets.
Investors will need to explore scenarios outside the “central base case of benign inflation and a higher-than-expected return outlook”, the paper says.
Given the broader suite of institutional-grade alternative assets now available at retail level, Mercer says investors can more easily diversify beyond the bond-shares mix in hedge funds, private markets and the like.
The report also says wealth managers should ready for the potential polycrisis conditions by reviewing governance frameworks and portfolio implementation processes.
And finally, of course, in times of crisis – especially poly ones – investors can always call on third-party assistance.
“… engaging with the right partners could help with portfolio planning or delegating day-to-day management”.